One of the questions I hear the most is how much should you spend on a place to live. This is no surprise, being that it is typically the largest purchase most people make. But since we briefly looked at a mortgage or rent amount, what else should be considered?
Oftentimes people can quickly calculate the mortgage or rent of the dwelling they live in–but how many people can tell you how much their home or rental actually costs them… not many!
Now, you may be thinking, what is included or should be included in the cost for the place you live? Now, this is different than what you qualified for and proceeded with at a leasing office or for a mortgage company. This is your total cost of housing. Oftentimes people only factor in the cost of their mortgage or rent.
What about all the ancillary costs, though?
In a previous episode, we went over the 7 Hidden Costs of Homeownership. I covered the cost of a down payment, or if you are renting, this would be the first and last month’s rent. I covered closing costs; if you are renting, this would be a form of a damage deposit. I covered out-of-pocket repairs the property may need, like a new appliance, paint, or flooring. I also covered start-up utilities, insurance, HOA initiation, dues, taxes, and any recurring subscriptions like an alarm system. Finally, I covered outfitting your space to be move-in ready, renovations, and furniture.
Now, this isn’t a comprehensive list, especially if you are buying the home to do extensive renovations. However, thinking about this could prevent you from making a huge financial decision without counting the cost.
Oftentimes we get so excited about getting a new place that we don’t count these costs. We don’t look at the upfront costs close enough or consider the recurring costs that will reduce our discretionary income.
We can so easily justify purchases just to get the space to feel like home. But then, before we know it, we end up house-poor. We spend a significant percentage of our income to pay the bills on the property.
Beyond this, we don’t often consider how long we actually plan to live there. We may not factor in that we plan to move in a year or two, we may not factor in capital gains if we live there under two years of the total period of time we own the property, and we may not consider the economic climate, where prices are trending, whether the neighborhood is on an up or downtrend. We also may not consider the cost of commuting and the impact of location that affects those costs or that the dwelling is situated on a floodplain adding an insurance policy. These, of course, are what if’s, and I don’t recommend that you dwell on them but instead just consider them, be aware of them, and ensure that you are factoring in those that may apply to the space you are looking at.
Upon closing and after all of the inspections have been done, you may have a list of items that were included to be resolved by the seller, and you will most likely have a list of those that were not touched and that you will need to address. You may also consider servicing all major systems/appliances services such as an HVAC unit, swamp cooler/evaporative cooler, radiant system, water heater, fridge filtering system, vacuum system, septic and sewer, and water pressure, amongst others.
I followed this process when purchasing a home a couple of years ago that was a foreclosure. The house didn’t need a ton of work, but I did have to get it painted, replace the flooring, light fixtures, landscaping, and appliances, as well as buy furniture for a larger space than I had before. When I was finally done investing into the space, I had spent north of $42k after the purchase!
This was all calculated, but nonetheless was a huge sum to make the house a home and not just a home, but my home.
CTA:
My call to action is to begin tracking how much actually goes into your dwelling. Track your payment, utilities, any repairs, decorations, furniture, or renovations, over the last six months and see whether that figure averaged out (meaning that you add up the total and divide by 6) is reasonable for the value that you place on that space.
